The Current Global Credit Crunch - Example

Report International Business Finance Appendix S. no. Context Pg. No I. 3 2. II. Introduction 4 3. III. The Basics: Global Credit Crunch 5 4. IV. Risk for the Asian Companies 7 5. V. Section A: Causes and Consequences 8 6. V.(a) Causes of 1997 Downfall 9 7. V.(b) Major Causes of Crisis 10 8. V.(c) Consequences of the Crisis 10 9. VI. Comparison between current crunch and the 1997 Asian Crunch 11 10. VII. Judgment: Section A 12 11. VIII. Introduction: Section B 13 12. IX. Hedging the Risks 13 13. X. Judgment: Section B 14 14. XI. References 15 15. XII. Bibliography 17 I. Abstract As we have seen in the past the Global Credit Crunch definitely causes a tremendous economic deceleration. The officials at International Monetary Fund (IMF) claim that a risk of economic slowdown and instability has increased tremendously and “the largest impact of this Global Credit crunch will be on the economy of the United States of America in the year 2008.” BBC News (2007) Credit crunch hits world growth, Available at: http://news.bbc.co.uk/1/hi/business/7010277.stm (Accessed: 25th December 2007) This economic instability will drastically affect the companies that deal in exporting their produced goods or services to the developed economies like the U.S.A and the United Kingdom. A credit crunch might mean lower imports from these developed countries and a slack marketing year for many Asian exporters. Many drastic steps need to be taken by most of these exporters if they want to survive the year 2008 as it is predicted. Of course if the predictions go wrong and the economic slowdown doesn’t occur, it would definitely be great news for each and every company that deals in exports (especially to the developed countries). But it is more likely that this global credit crunch will cause a terrible economic slowdown. Many measures might be taken to help retain the businesses of these export enterprises. II. Introduction The current Global Credit Crunch has started to worry many financial bankers and property dealers all across the world, but the most worried people that deal in finance or property are from the United States of America, because according to the latest news by the BBC Group (which was on behalf of the statements made by the International Monetary Fund or the IMF) is that “the largest impact of this Global Credit crunch will be on the economy of the United States of America in the year 2008.” (BBC News (2007) Credit crunch hits world growth, viewed 25th December 2007). The global credit crunch is definitely a thing to be worried if you reside in U.S.A., as a matter of fact, not only the United States but other developed economies in Europe such as the United Kingdom will also face negative consequences of this global credit crunch. A global credit crunch affects the economies of developed as well as developing countries in many different ways. In this report we would discuss the ways pertaining to the process of hedging of many predicted risks that might be the outcome of this global credit crunch. III. The Basics: Global Credit Crunch What is the Global Credit Crunch? Currently we constantly hear a lot about the “Global credit Crunch” or the “Global Financial Crunch” or “Global Monetary Fund”, every financial newspaper, news channel and any type of financial media is constantly stressing on the effects of Global Credit Crunch. So, the question that arises is “What is Global Credit Crunch?” Well, the global credit crunch basically started with the crash in the American Mortgage markets (Future nest egg, Accessed 27th December 2007). So to understand the exact and more precise reasons for the global credit crunch we must first understand the basics and reasons for the crash in the Mortgage markets in the developed countries, for example: America. Similar to all the other under developed, developing and developed countries the people in America go to banks and other private or public financial institutions for loans to purchase homes or properties, these loans are usually known as home loans and property loans. So for banks to give that kind of money to the public, the banks themselves need a large amount of money to suffice the needs of every qualified individual and for that specific reason the banks take 2 measures: 1. Safe Deposits from the public. But this is pertinent to banks only and not other non banking financial institutions like private financers. 2. Loans from further larger institutions that provide loans to banks and work on a multinational and worldwide basis. Although few negative headlines have been written in financial papers and other financial news sources regarding the mortgage defaults and non payment of mortgage, still the mortgage industry in the United States of America has been quite tranquil since the past few years. Several improvements have been made since the country faced mortgage default problems; one of those improvements was to check the creditability of the loan buyer, thus facilitating the banks to understand better and chose the most proper person to give the loan to. According to this it is very clear that the mortgage industry will not fall and of course the default rates have gone down in both the U.S. and the U.K. But still it can easily be predicted that the interest rates are going to rise further and thus it is best for any individual to start saving money and stay clear of obnoxious expenses. IV. Risk for the Asian companies Of course the economies of the developed countries such as U.S.A. and U.K. will decline in economic terms and it is definite that this decline will definitely affect the businesses in lesser advanced countries such as those in Asia (in fact, especially those in Asia), because of the fact that most of these countries such as China, Thailand, Korean, Singapore, India, etc. Rely only on the income generated through the exports of goods to these countries; as a matter of fact some of these countries export more then 70 % of their total Gross Domestic Production. The global credit crunch will definitely lead to a dramatic loss for these Asian companies and especially those that mainly deal in exports. Not only that but the global credit crunch will affect these companies in a really unpleasant way and might force these companies to take several very drastic steps such as cutting of staff, selling of assets, bad annual results, etc. All of this will leads to the fall in the stock prices and thus the market capitalization of these companies will tremble and thus creating a havoc. Disappointed... Well, the above mentioned mess is not even half of what’s going to happen... but it’s nothing to be disappointed about, after all as it is said “What goes up must come down”. There is nothing to be afraid about, these economies have grown just too much and thus they will definitely face a correction and most probably this correction is in the whole next year. So have these export companies done anything wrong if they predicted great sales next year and hired more staff and purchased more and more machinery and equipments. No, not at all, this credit crunch is just a matter of time before the banks and other financial institutions can sort out this “bad credit” mess. After all the people that are working for these institutions are extremely talented and had already predicted this downfall and most of these export companies are very much prepared to face the consequences and have made several very excellent strategies to overcome this downfall. So it is better to be prepared then to be scared. V. Section A: Causes and Consequences Introduction It is a studied fact that the Global Credit Crunch will definitely affect the overseas sales of Asian exporters (as it has already been experienced while the 1997 Asian Financial Crisis). This is because the Asian exporters are mostly based on exports to developed countries such as America and U.K., especially Zimatzu. As it is stated the Korean multi national (Zimatzu) only exports to developed countries and as it has already been stated by the IMF that the biggest losers of this Global credit crunch will be the developed countries like U.S.A and U.K., (Source: BBC News (2007) Credit crunch hits world growth, viewed 25th December 2007) it is a bad news for the company and the company needs to be prepared for the consequences. The company can prepare itself for the consequences by studying the causes and consequences for a similar global fall down which may be the 1997 Asian Financial Crisis and thus we will first discover the causes and consequences for the 1997 Asian Financial Crisis. V. (A) The Causes and Consequences of 1997 Asian downfall The 1997 Asian Crisis was a quite similar situation that was faced in the year 1997 and even then most of these companies survived to see this current downfall. This crisis had been referred to as the “IMF Crisis” also. The start of the Crisis Until the start of the year 1997 Asian economies took over almost 50 % of the trade (EXIM trade) of the developed countries. The 1997 Asian financial crisis began in Thailand when Thailand’s Forex and Stock Markets crashed tremendously on the basis of a decision made by the country’s own government’s policy which was related to floating of Thai’s Baht and some rumours relating to “IMF Monetary crisis”. Exactly at that same time the government of Thailand had accumulated lots of loans from foreign banks and thus made Thailand totally bankrupt. This was the time when the crisis started to spread like a disease and moved on towards further Asian countries such as Japan, which finally resulted into most of the Asian countries to be debtors. The countries that were highly affected by the 1997 Asian financial crisis were South Korea, Thailand and Indonesia. Other economies such as Malaysia and Hong Kong also faced a currency downfall (against the USD) but they were not as severely affected as those whose names are mentioned above. The minor causes of the crisis are yet not cleared (some analysts have questions pertaining to even the larger causes) but the chief causes have been judged by the majority. V. (B) Causes: 1997 Asian financial crisis Even though there is sort of a debate between many financial analysts pertaining to the causes of the crisis, it has been debated upon 2 major views: 1. The financial mayhem in the year 1997, “sudden and immediate changes in market expectations and confidence followed by regional contagion” (Jahyeong Koo, Sherry L. Kiser, Oct. 2001, ‘Recovery from a financial Crisis’, ‘Economic and financial review’, Radelet and Sachs 1998; Marshall 1998; and Chang and Velasco 1999, available at: http://findarticles.com/p/articles/mi_m0DKI/is_4_2001/ai_84799965). 2. The second argues that “the crisis occurred primarily as a result of structural and policy distortions” (Source: Juzhong Zhuang and Malcon Dowling, 2007, ‘Identifying Historical Crisis Episodes’, ‘Lessons of the Asian Financial Crisis: What Can an Early Warning System Model Tell Us?’, Corsetti,Pesenti, and Roubini 1998; Dooley 1999, Pg: 1-16). This debate is basically based on the fundamental factors and as said in the book was caused by “fundamental imbalances” and rumors which caused over selling in the markets and caused the downfall in the currency. V. (C) Consequences of the Crisis The consequences of the 1997 Asian financial crisis were unimaginable and disastrous not only for the year of 1997 but on a long term scale. The following were the consequences: 1. Tremendous fall in currency prices. 2. Tremendous fall in the stock markets. 3. Caused the market capitalization of many companies to fall sharply. 4. Fall in Asset prices. 5. Many businesses collapsed. 6. A large population of about millions of people lost a lot of money which resulted in millions of people going below the poverty line. VI. Comparison between current crunch and the 1997 Asian Crunch Many Forex and other financial analysts all around the globe believe that history is going to repeat itself. The markets are going to crash badly again as they did in the last financial crisis which was the 1997 Asian Financial Crisis. But this time the crisis is not for the Asian companies but as a matter of fact the crisis this time is upon the more developed countries like the United States of America and United Kingdom. Even though the crisis is not for the Asian companies but upon the more developed countries like the United States of America and United Kingdom, the crisis (if it will come) will definitely affect (negatively) the Asian countries, because of a simple fact that most of the Asian countries get a large part of their revenues from exports and under – sourcing solutions from the developed countries. The comparison between the crises can be done very easily by just comparing the consequences, which may be the fall of currency prices, and as we all know the USD is getting weaker against many Asian currencies. As it has been stated by the famous currency analyst Richard Lee on dailyfx.com “Ten years ago, everyone was worried about Asian contagion and now ten years later, that concern has turned to US contagion.  Last week, some traders have thought that the sharp liquidations in the currency and equity market meant the end of the world, but the rebound in the past few trading sessions have brought back hope that the worst of the credit crunch of 2007 may be over.  But is it?” (Source: Richard Lee, 21st August 2007, ‘The lessons learned from the Asian financial crisis’, ‘US Contagion is the Worry of the World,10Yrs Ago It Was Asian Contagion’, viewed 28th December 2007, url: http://www.dailyfx.com/story/topheadline/US_Contagion_is_the_Worry_1187720474353.html) VII. Judgment: Section A The Global currency crunch will definitely affect the Asian companies and since the prices of the Asian currencies will tremble against the USD and that will severely affect the exports, of course that will be good for the imports but since it is a known fact that these countries strive only based on the exports. VIII. Introduction: Section B The current Global Credit Crunch has started to worry many financial bankers and property dealers all across the world, but the most worried people that deal in finance or property are from the United States of America, because according to the latest news by the BBC Group (which was on behalf of the statements made by the International Monetary Fund or the IMF) is that “the largest impact of this Global Credit crunch will be on the economy of the United States of America in the year 2008.” (BBC News (2007) Credit crunch hits world growth, viewed 25th December 2007). Expecting any kind of FDI is not a recommended option for any Asian company as the news of the global currency crunch has already spread too much and the World’s financial institutions will definitely stay clear of trying to block funds especially with an export company. IX. Content Section B: Hedging these risks The option of expanding their businesses into other regions like South America and Middle Eastern countries is good because many of the countries there are developing and it is very easy for the Korean Exporter to find strategic partnerships in those countries and that too at a very low cost. The purchase power of the people in these developing countries has been constantly growing along with their standard of living. In case the company is seriously planning to capture the markets in other regions, mergers will always be a better option than acquisitions, thus leading to lower FDI (Foreign direct investments) and also this will provide the marketing staff and training requirements of the company. Not only that but the development of the business will also cause overall positive sentiment in the markets thus lowering the effects of the crisis. IX.(A). FDI Theories Many economists all around the globe have been trying to explain the FDI theories since a very long time now and are still stuck at some major factors such as: 1. FDI is a very complicated field, not only that but it involves and covers many fields in economics. 2. These theories are also stuck at the topic “In a perfectly competitive economy, Foreign direct investment would not exist”. 3. Economists have started focusing on imperfect competition. 4. Strategic assets looking for FDIs would empty the entrance by competitors. X. Judgment So it is to conclude that expecting FDI is not the best option for the company as the news of the global currency crunch has already spread too much and the World’s financial institutions will definitely stay clear of trying to block funds especially with an export company. Thus being prepared for the Global crisis and trying to expand the markets in other regions such as South America and Eastern countries is a much better option then to put in more money hoping to save the company from the crisis. As according to the above statements, even a lot of money can not prevent the crisis. XI. References IMF Global Financial Stability Report, 2007, BBC News 2007, Credit crunch hits world growth, viewed 25th December 2007, available at: http://news.bbc.co.uk/1/hi/business/7010277.stm. Anonymous Blog, 18th December 2007, Future nest egg, “What is Global Credit Crunch?” Accessed 27th December 2007, available at link: http://futurenestegg.com/global-credit-crunch/#more-17 Jahyeong Koo, Sherry L. Kiser, Oct. 2001, ‘Recovery from a financial Crisis’, ‘Economic and financial review’, Radelet and Sachs 1998; Marshall 1998; and Chang and Velasco 1999, available at: http://findarticles.com/p/articles/mi_m0DKI/is_4_2001/ai_84799965 Juzhong Zhuang and Malcon Dowling, 2007, ‘Identifying Historical Crisis Episodes’, ‘Lessons of the Asian Financial Crisis: What Can an Early Warning System Model Tell Us?’, Corsetti,Pesenti, and Roubini 1998; Dooley 1999, Pg: 1-16 Richard Lee, 21st August 2007, ‘The lessons learned from the Asian financial crisis’, ‘US Contagion is the Worry of the World,10Yrs Ago It Was Asian Contagion’, viewed 28th December 2007, url: http://www.dailyfx.com/story/topheadline/US_Contagion_is_the_Worry_1187720474353.html XII. Bibliography Michael B. Connolly, 2006, ‘International Business Finance’, The books is filled with knowledge about the techniques used by many renowned financial dealers and traders and also their secrets towards various business and economical strategies. Thomas W. McRae, 1996, ‘International Business Finance – A concise Introduction’, This book includes excellent international coverage and also is very helpful in understanding the basics of the international business finance. This is what we can refer to as an intermediate level guide. Read More